The election of a Republican president and a Republican majority in Congress significantly increases the likelihood of a reduction in the Federal income tax rates for 2017. With that in mind, many taxpayers should consider accelerating their 2017 charitable contributions into this year in order to maximize the tax savings if tax rates do go down next year.
Both President-elect Trump and the House Republicans have put forth a plan which would lower tax brackets to 12%, 25% and 33%. This would reduce the tax benefit of charitable contributions for almost all taxpayers in 2017 compared to 2016 charitable contributions.
Because of the distinct possibility of lower marginal Federal income tax rates next year, most taxpayers should consider accelerating their 2017 charitable contributions into 2016. Even if tax rates are not lowered next year, the cost of accelerating deductions into this year would be nominal for most taxpayers. The tax benefit of the deduction would be received a year sooner, while the cost of the charitable contribution would be paid somewhere between one and thirteen months sooner. The loss of earnings on these amounts would be relatively nominal for the potential tax savings of up to 39.6% this year compared to a maximum of 33% next year if the Trump tax proposal is enacted.
While most taxpayers will benefit from accelerating their charitable contribution deductions into 2016, there are some exceptions:
- taxpayers who claim the standard deduction would receive no tax benefit from charitable contributions this year
- taxpayers who would be in the 33% bracket in 2017 and are paying a 28% Alternative Minimum Tax (AMT) this year. (Note that some AMT taxpayers have an effective marginal AMT rate of 35% due to phase-out of the AMT exemption as income exceeds $159,700 on joint returns and would benefit from acceleration.)
- taxpayers whose charitable contributions exceed 50% of their Adjusted Gross Income (AGI)
- taxpayers who are not in the maximum bracket this year whose ordinary income is expected to increase significantly next year
- taxpayers with over $259,400 of AGI whose itemized deductions are so low when compared to their AGI that only 20% of their itemized deductions are allowed due to the Pease Amendment.
To the extent none of these exceptions apply to you and you are expecting to save an additional 6.6% in tax from charitable contributions pulled forward to the current year, you may even want to consider accelerating several years of contributions into this year. The break-even point for accelerating contributions should be several years out, depending on how much you would otherwise earn on the amount prepaid.
If you want to receive the tax benefit of the deduction this year and are willing to fund your charitable contribution, but do not want to have to have the funds go to your charities until some later time, you should consider establishing a donor-advised fund (also known as a philanthropic fund). A donor-advised fund lets you make currently deductible contributions which will be invested until they go to the charity you recommend. Many community foundations and large mutual funds offer donor-advised funds. These organizations differ in the minimum contributions to the fund, the minimum size of contributions you can recommend from the fund, the investments permitted and the fees charged.
A valuable charitable planning technique that should remain viable under the Republican tax proposals is the gift of appreciated long-term capital gain property to charity. You deduct the full fair market value of the gift, yet you never have to pay the tax on the capital gain. This benefit adds substantially to the value of a charitable contribution. Long-term capital gains this year are taxed at a federal income tax rate of as much as 25%, plus state income tax (if any). The Republican tax proposals would decrease the maximum Federal income tax rate on long-term capital gains to 20% if enacted as proposed. If you have very highly appreciated long-term capital gain property, your tax savings from the charitable contribution are increased by the amount of capital gains tax avoided by the charitable contribution. In order to maximize the benefits of your charitable contributions this year, consideration should be given to the amount of appreciated long-term capital gain property that you can give to charity this year and in the future. This is significant as the benefit of giving highly appreciated property even at a lower income tax rate in the future could exceed the additional 6.6% tax benefit available from a contribution this year.
There are two other tax proposals, which if they become law next year, would make it even more beneficial to accelerate charitable contributions into 2016.The tax proposal introduced in 2014 by former House Ways and Means Committee Chairman David Camp would limit the deduction for charitable contributions to the taxpayer’s adjusted tax basis in the property. If this proposal is enacted, the benefit of contribution of appreciated long-term capital gain property to charity would disappear. President-elect Trump’s tax proposal would limit itemized deductions to $200,000 for joint returns and $100,000 for individuals. For wealthy taxpayers who are charitable, if this provision is enacted, most or all of the tax benefit for charitable contributions would be eliminated in the future.
